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A Utah-based operation that lured online customers with free samples of a purported weight-loss supplement in a scheme to obtain their credit or debit card information has agreed to pay $150,000 to settle Federal Trade Commission charges of deceptive and unfair marketing, and of violations of federal regulations governing the electronic transfer of funds.

According to the FTC’s complaint, the defendants, operating through their umbrella company Ultralife Fitness, Inc., lured customers by promising to send, for a specified trial period, free samples of the dietary supplement Hoodia, which they claimed caused weight loss. The supplement was purportedly derived from the cactus-like Hoodia gordonii plant, which is found in southern Africa.

The FTC’s complaint also alleges that customers provided their credit or debit card information with the understanding that it would be used only to cover shipping and handling costs of the free Hoodia samples. However, customers later discovered that the defendants had enrolled them, without their consent, into continuity programs – one for periodic shipments of Hoodia (at a cost of approximately $50 a month) and another for fitness instruction (at a cost of approximately $30 a month). The complaint states that the defendants withdrew funds or assessed fees before consumers received the Hoodia, after the Hoodia was received but before the trial period ended, and even when the consumer never received the Hoodia supplement.

Also according to the FTC’s complaint, in addition to providing inadequate notice of enrollments in the continuity plans, the defendants failed to give consumers adequate notice of fees, costs, and cancellation polices; and failed to inform them that their financial account information would be used to pay for the continuity plans. The Web site’s order pages made no reference to this information; instead, it was buried in nearly 12 pages of text in the site’s “terms and conditions” section. Further, the link to the terms and conditions section did not convey the relevance or significance of the information.

The FTC’s complaint alleges that corporate defendants Ultralife Fitness, Inc. and Tru Genix, LLC, both of which are based in the South Jordan, Utah, and individual defendants Neil P. Wardle, Pace Mannion, and Christopher J. Wardle violated the FTC Act by:

• failing to adequately disclose information about continuity plans, fees, and cancellation policies;
• misrepresenting that consumers would enjoy a specific trial period during which they would not be charged for anything except shipping and handling of Hoodia samples, and that consumers could cancel their continuity plan memberships;
• routinely billing the consumers’ credit and debit cards without obtaining their express informed consent; and
• making false and unsubstantiated statements that Hoodia would cause long-term or permanent weight loss, including by increasing one’s metabolism, without a consumer having to reduce caloric intake, increase physical activity, or take any other additional steps.

The FTC’s complaint also alleges that the defendants violated the Electronic Fund Transfer Act (EFTA) and other federal regulations governing written authorization for electronic transfer of funds.

Under the terms of the proposed settlement, the defendants are ordered to pay $9.9 million, which is the total estimated consumer injury. However, based on their inability to pay, all but $150,000 of that judgment is suspended. Each of the three individual defendants is responsible for paying $50,000 of the $150,000 owed to the FTC.

Also under the terms of the proposed settlement, the defendants are barred from misrepresenting any material fact in connection with the sale of a dietary supplement, food, drug, device, or heath-related program or service. The same prohibition applies to material facts used to market products or services offered through a “negative-option” plan – a plan in which goods or services are provided automatically, and consumers must either pay for the service or specifically decline it in advance of billing. Specifically, the defendants cannot misrepresent the cost or charges for any good or service they offer; whether a transaction has been authorized by a consumer; that a product burns a significant amount of fat while the user sleeps; that a product can cause substantial weight loss with no additional effort; that a product can cause weight loss of two pounds or more per week without diet or exercise; and that a product can safely enable consumers to lose more than three pounds per week for more than four weeks. The defendants also are barred from using billing information to acquire payment from consumers unless defendants first obtain informed and express consent from the consumers. In addition, the defendants must obtain written authorization for preauthorized electronic fund transfers, in accordance with the EFTA.

The proposed settlement also requires the defendants to disclose all fees and costs, and all material restrictions, limitations, or conditions applicable to the purchase, receipt, or use of any product or service they offer. The defendants also must disclose all material terms of the continuity plans they offer, including any negative option plan. They also are required to provide a refund within seven days if they offer a money-back guarantee and the consumer submits a valid refund request. The defendants also must honor valid and timely requests to cancel a membership, subscription, or agreement to purchase.

The settlement also contains various record-keeping and reporting provisions to assist the FTC in monitoring the defendants’ compliance.

The Commission vote authorizing the staff to file the complaint and agreed-upon final settlement was 4-0. These documents were filed in the U.S. District Court for the Central District of California on November 20, 2008.

NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant or respondent has actually violated the law. The stipulated final order is for settlement purposes only and does not constitute an admission by the defendants of a law violation. A stipulated final order requires approval by the court and has the force of law when signed by the judge.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.

(Ultralife NR.wpd)
(FTC File No. 062-3146)